Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe provided they retain their documents for this period of time.
However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.
Create a Backup Set of Records and Store Them Electronically. Keeping a backup set of records -- including, for example, bank statements, tax returns, insurance policies, etc. -- is easier than ever now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet.
Even if the original records are provided only on paper, they can be scanned and converted to a digital format. Once the documents are in electronic form, taxpayers can download them to a backup storage device, such as an external hard drive, or burn them onto a CD or DVD (don't forget to label it).
You might also consider online backup, which is the only way to ensure that data is fully protected. With online backup, files are stored in another region of the country, so that if a hurricane or other natural disaster occurs, documents remain safe.
Follow our simplified guide to help you navigate the IRS’s record retention requirements:
Income Tax Returns and Related Items- keep for at least 7 years. Keep supporting documentation for at least 4 years. Keep all federal and state returns, as well as supporting documentation. If you did not file a return, keep supporting documentation indefinitely, as there is no statute of limitations for tax payments in such a case.
Gift Tax Returns- keep permanent records. These returns should be retained, as they will need to be filed with estate tax returns.
Mailing Receipts- keep as long as returns. If you filed a paper return, keep the receipt with a copy of your return. If you filed electronically, keep a copy of the filing confirmation. This will help you avoid late filing penalty fees in case your return is misplaced or lost by the taxing authority.
Personal Records- keep permanently. Keep a permanent file of your family’s personal records, such as: birth certificates, marriage licenses, divorce agreements, Social Security cards, or any other legal document. These documents are necessary for many different types of situations.
Stocks and Bonds- keep for at least 10 years. You will need these records to substantiate the amount of gain or loss when you sell them, as well as the nature of the gain or loss (i.e. long-term or short-term).
Gifts/Inherited Assets- keep permanent records. Records of tax basis will be needed for valuation if you sell your assets, or if you are involved in a marital separation.
Residential Property – keep closing documents and title policies permanently. When you sell your residence, you need this information to determine how much of your gain will be tax-free.
Employment Contracts- as long as employed by the company. Retain for longer if you have any remaining commitments past employment.
Rental Real Estate- until sale or disposal of property. Keep records of cost, purchase date, cost of improvements, and depreciation schedules.
Wills and Trusts- keep current until relevant. It is also a good idea to keep superseded ones to leave a trail of how it has developed. Make sure to clearly mark which ones are no longer in effect.
Retirement Plans- keep contribution records until all funds are withdrawn. Maintain these records to ensure that your tax liability is accurate when you begin to withdraw funds.
Medicaid Applications- keep all bank and brokerage statements from preceding 5 years. These documents are necessary in order to apply for Medicaid.
Partnership and Business agreements- as long as you retain an interest. Keep these types of agreements as well as basis information for as long as you retain an interest in the business entity.
Art, Jewelry, Collectibles- as long as you own them. Keep all records of purchase and appraisals, because it will be needed to determine basis if you sell or gift those items, or to establish a loss for insurance purposes.
Military Papers- keep permanently. Keep records of benefits and discharge, because you will need them when applying for Social Security or veteran’s benefits.
Legal Judgements and Loan Satisfactions- keep permanent records. This is a good piece of information to keep indefinitely as proof that you have no outstanding debts or obligations.
Insurance Policies- keep current records handy. Also, retain expired policy documents until you receive a report that your policy is no longer in effect. You can also use old reports to compare rates and coverage.
Warranty Expiration- keep for a year after expiration. Companies sometimes make exceptions.
Escheat information- keep permanent records of prior addresses. This can be in the form of a utility bill or bank statement; these can be used in case proof needed to recover escheat funds.
If you’re ever unsure whether or not to keep something, it’s better to be safe than sorry. In this day and age, it’s a lot easier to retain your documents digitally instead of worrying about misplacing papers. Keep in mind that anything that must be discarded should be shredded, so no one can steal and use your information. If you have any questions regarding record retention, call us at 201-525-1222.
Caution: Identity theft is a serious threat in today's world, and it is important to take every precaution to avoid it. After it is no longer necessary to retain your tax records, financial statements, or any other documents with your personal information, you should dispose of these records by shredding them and not disposing of them by merely throwing them away in the trash.
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